The number of companies asking shareholders for money has jumped in the last few days, highlighting the diverging fortunes of UK companies. While some are turning to shareholders for cash to tackle unwieldy levels of debt, stronger businesses are looking for funding to snap up heavily discounted assets and fund growth plans.
Property group Workspace was first in line, that it is looking to raise £87.2m, before costs, through a five-for-one rights issue at 10p a share. The Reit – which provides office space to small business – said it runs a "material risk" of a covenant breach after the value of its properties slumped by 25.5 per cent in the last nine months of 2008. Its bankers – which include RBS and GE - have agreed to extend covenants if £50m of short term debt is paid down, although Workspace will need to pay huge fees for the privilege.
Engineering group Cookson has also confirmed that it will ask shareholders for cash in what analyst Harry Philips at Evolution Securities describes as an "eyewatering" twelve-for-one deal. The company is looking for £240m to ensure that it doesn’t breach its 2009 net debt to EBITDA covenant of three times. Cookson’s net borrowings currently stand at approximately £732m.
The fund raisings are not good for shareholders who don’t want to increase their exposure to such troubled companies. Analysts at broker JP Morgan estimate that shareholders who decide not to take up their Workspace rights, for example, will suffer an 83 per cent dilution, but, as analyst Ian Wild at Blue Oar Securities points out, run the risk of “potentially throwing good money after bad” if they do.
That's very much our view, as we currently have negative stances on both companies.
Next shoes to drop...
And analysts warn that the number of cash calls in the coming weeks could increase. Evolution highlights aerospace supplier Meggitt as a possible candidate, pointing out that effect of currency movements on its £970m debt could leave it perilously close to breaching covenants. “Meggitt should issue stock while it has enough of a share price to raise enough money to solve the problem,” said analyst Nick Cunnigham.
But several companies appear to be calling the bottom of the market by placing shares in the open market. Savvy property group Helical Bar completed a £27.7m share placing to give it firepower to buy up prime properties from troubled banks. Helical’s chief executive Mike Slade is well known for his successful track record in calling the peaks and troughs of the property cycle.
Meanwhile, condom maker SSL International revealed that it had raised a gross £87m by placing 19.2m new shares. SSL – whose shares have outperformed the FTSE All share by 31 per cent over the last 12 months – wants the money to “pursue selected bolt-on acquisitions” and fund its medium term growth plans.
Giant miner Xstrata was also rumoured to be planning a cash call to buy up bombed-out assets, but this speculation now appears to have been incorrect. Xstrata revealed a two-for-one rights issue that will raise £4.1bn pre-costs, which it will use to pay-down a chunk of its hefty debt pile. The situation was complicated, however, by what analysts describe as a "sweetheart deal" with major shareholder Glencore, which owns 35 per cent of the company. Xstrata will spend $2bn buying a coal mine from Glencore, providing it with the cash it needs to take up its rights and avoid dilution.
